Is Cisco Undervalued?

There are few companies with a record of growth in revenue, earnings, and stock price to match Cisco (NASDAQ:CSCO). From the the company's website I have included a chart of its revenue growth. The history of this company is just as intriguing as the usual garage start-up story that is the story of Apple (NASDAQ:AAPL) and other Silicon Valley companies.

I do not own any shares of Cisco. The stock closed at $21.42 on Jan. 26, down $0.12 (0.56%) on the day.

Cisco was founded on December 10, 1984 by husband and wife Len Bosack and Sandy Lerner, two former Stanford University computer scientists whose efforts to enable email between computers on different networks led to the invention of the first multiprotocol router. This seminal breakthrough played a major role in fueling the growth of the Internet.

This company generated an incredible record of revenue growth:

And yet the stock price has lagged the growth in revenue. If we look at a 10-year chart of Cisco from Fidelity.com, we can see that Cisco has gone absolutely nowhere during this period of continued growth.

Is it possible, then, that with this absence of price appreciation while the company continued to grow its business, that Cisco might just possibly be a terrific value for an investor? Or will this stock instead be stuck in another 10-year period of no price appreciation?

Let's briefly take a look at Cisco and its stock, and see whether it might be something we should be adding to our own porfolios.

CSCO reported first quarter 2011 results on November 10, 2010. Revenue for the quarter came in at $10.75 billion, 19% above the forecast of $10.74 billion. Earnings came in at $0.42/share (after unusual items), beating expectations of the $0.40/share that the analysts expected. All in all it wasn't a bad report, except that there was some uncertainty about the economy and concern that new orders were below company expectations. The stock didn't bounce on the news of the earnings exceeding expectations, but dipped again on the guarded outlook.

Looking longer term at Morningstar, we can see that the company has grown even while the stock price stagnated with revenue of $28.5 billion in 2006, increasing to $40 billion in 2010 and $41.8 billion in the trailing 12 months (TTM). Diluted earnings per share came in at $0.89/share in 2006, increasing to $1.33/share in 2010 and $1.36 in the TTM. During the same period, CSCO has been buying back shares with 6.3 billion in 2006, reducing this number to 5.85 billion in 2010 and 5.80 billion in the TTM.

In terms of the balance sheet, Morningstar shows Cisco with $51.4 billion in current assets as of July 2010, and $19.2 billion in total current liabilities. Indeed, total liabilities -- including both current and long-term liabilities -- totaled $36.8 billion, suggesting CSCO was financially fit, easily covering all of its liabilities with just the current liabilities.

Free cash flow has been solid, with $7.1 billion reported in 2006, increasing to $9.18 billion in the TTM.

Valuation-wise, looking at Yahoo Finance's "Key Statistics," we can see that this is a large cap stock with a market capitalization of $118.73 billion. The trailing p/e is 15.64 and the forward p/e (fye Jul 31, 2012) is 11.70. Thus, the PEG ratio is a very inexpensive 1.09. Yahoo reports 5.54 billion shares outstanding with the same number of shares that float. As of Dec. 31, there were 41.16 million shares out short representing 0.6 days of trading volume (well below my own arbitrary three-day rule). There are no dividends paid, and the last stock split was over 10 years ago -- a 2:1 split on March 23, 2000. It should be noted that Cisco, while currently not paying a dividend, intends to start paying one in 2011, per The Wall Street Journal (subscription required).

As I indicated above, CSCO has gone relatively nowhere in terms of its stock price for the past 10 years. Looking at a recent StockCharts.com entry, we can see that for at least the past six years, Cisco has experienced a sine wave pattern in stock price.

From all of this, we can see that certainly Cisco as a stock has good value with a p/e in the low teens and a PEG just above 1.0. The company has been growing its revenue and earnings, but its stock price has been lagging. As our economy recovers and interest in networking and cloud computing grows, it appears that we may be early in Cisco as an investment -- and with valuation where it is, it appears to be in a good position to appreciate in price.

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